Jun 24, 2016

Oil & Gas Industry Health Watch

Posted by Dan Turner

We have been talking about the shift in the industry health for oil and gas as the supply crosses under demand. It appears a few other unforeseen elements are weighing in as well. But one interesting shift is the change in mood of professional bloggers and writers. As of late, there has been an appearance of optimism and a general recognition of the profitability of $50-$60/BL oil.

Forbes, the capital folks, are writing "Is $50 oil the new $100?"iStock_000003513438Large.jpg

Maybe this new optimism has a loose finger grip on the near $50ish/BL oil since mid-May? Even some of the capital and investor folks are sounding less pessimistic. It is classic in this industry that just about the time that some of the best talent has been cut, the investment starts rolling back in to rebuild. Last week, two of the best of the industry were let go. So the change in mood, for me, should have been less of a surprise.

In Tom Morgan's latest blog post, he teases the following as a rationale for the $50: the fires in Alberta, the destabilization of Brazil, the unrest in Eastern policy, and so on. He also goes on to point out the ability of Texas unconventional shale to react quickly should demand surge.

The U.S. Energy Information Administration is a tremendous resource whose summary supports my current bet for $60/BL by Christmas:

"The current values of futures and options contracts highlight the heightened volatility and high uncertainty in the oil price outlook (Market Prices and Uncertainty Report). WTI futures contracts for September 2016 delivery that were traded during the five-day period ending June 2 averaged $50/b, and implied volatility averaged 35%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in September 2016 at $36/b and $69/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $31/b and $83/b for prices in December 2016. At this time in 2015, WTI for September 2015 delivery averaged $60/b, and implied volatility averaged 33%, with the corresponding lower and upper limits of the 95% confidence interval at $45/b and $81/b."

They also forecast a close relationship between supply and demand until a crossover around second quarter 2017, which could mean crazy pricing/BL again.

Drillinginfo is a higher-level data analytics company pulling their information from the report data flowing into the databases of controlling agencies—think Texas Railroad Commission, Borough of Land Management, and so forth. Here is their vision of the result of streaming field data.

The short version? Currently, the world demand is a little under current production with a new sustainable price of $50/BL (yes, it will go up and down). Consumption right now is 95 million barrels/day. At $50/BL, we are looking at an world-wide industry with a daily cash inflow of $4,750,000,000/day that is recognizing the need for data from the field to the top-end analytic solutions for better business value. Anybody else smell an opportunity? It will take investment.

Business change happens in the market contractions and pricing corrections. It will be interesting to see who the new leaders will be in the next 10 years. 

What Do You Think?

I want to hear from you! Please leave a comment below and let me know what you think about the current status of the Oil & Gas Industry—and where it may be heading in the future.